"It is a sombre day for Palestinians and an anxious one for Israelis," he added.

An estimated 700,000 Palestinian refugees were created during the year-long war that followed the birth of the Israeli state 53 years ago.

That number has since swelled to about four million in camps in the West Bank, Gaza and neighbouring states.

Demonstrations are planned in all three areas, while Palestinian Authority leader Yasser Arafat will address rallies in the West Bank and Gaza through a telephone hook-up.

School children are being given the day off to attend speeches.

Israeli forces are reinforcing their presence while Israeli police are on alert.

Rannan Gissin, an aide to Israeli Prime Minister Ariel Sharon, told Reuters: "Most of our intelligence reports indicate that the Palestinians are preparing more violent activities and not just peaceful demonstrations as they claim.

"We want to stop this violence and I think if the Palestinians take that action and cease the tone of hostilities may be the Al-Naqba ... can serve as a starting point to return back to the negotiating table."

Israel, which uses the Jewish calendar for national and religious observances, marked its independence day earlier this year on April 26.

Death toll rises

On Monday, seven Palestinians died after being shot by Israeli soldiers in the highest death toll in a single incident for almost two months.

Five of the seven were Palestinian paramilitary policemen shot dead in the West Bank while the other two died in a grenade attack in Gaza.

Arafat said: "Israel did not kill them (the five policemen). Israel assassinated them."

Dore Gold, an adviser to Sharon, said Israel's actions were taken in self-defense.

The Israeli army said one of the men in Gaza had thrown a grenade and had a bomb strapped to his body along with a suicide note and a Palestinian flag.

It added that shooting attacks and attempted bombings had been carried out throughout Monday night, with one Israeli severely wounded after Palestinians shot at a bus in the West Bank.

Palestinians reported Israeli tank shell fire near the West Bank town of Ramallah.

Sharon said the army was seeking to find a balance between "protecting Israeli citizens and also not to lead to an escalation."

U.S. Secretary of State Colin Powell told CNN in Washington: "It is very disturbing that the cycle of violence continues to go upward."

Powell added that dialogue with both sides would continue "encouraging both of them to do everything they can to reduce the level of violence."

Palestinians and Israelis were expected to respond Tuesday to a 32-page report by the Mitchell Committee on the latest violence.

The fact-finding mission led by former U.S. Senator George Mitchell calls for a freeze on the construction of Jewish settlements in the West Bank and Gaza.

The Palestinians are expected to back the entire report, while the Israelis are believed to reject the settlement freeze.